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Wednesday, 14 May 2014

IFSB eyes stronger implementation of Islamic finance standards

The Islamic Financial Services Board (IFSB) will release an updated 10-year industry roadmap next week as it places greater emphasis on the implementation of its standards with regulators around the globe.

Guidelines from Kuala Lumpur-based IFSB, one of the main standard-setting bodies for Islamic finance, are gaining prominence as the industry takes a greater share of the banking sector in some Muslim-majority countries and makes inroads in western markets.

The IFSB will release a Mid-Term Review (MTR) of the industry’s 10-year framework document on May 19, outlining benchmarks to monitor industry progress in a more focused way, IFSB secretary-general Jaseem Ahmed told Reuters.

The original framework, released in 2007 by the IFSB and the research arm of the Jeddah-based Islamic Development Bank , identified 16 recommendations for policymakers but did not spell out detailed metrics to track their progress.

“The MTR proposes a stronger implementation plan. This plan includes concrete initiatives – to be undertaken by a range of stakeholders – to bring the recommendations to life.”

Founded in 2002, the IFSB’s initial efforts have focused on winning a wide membership base, leaving implementation and enforcement to national regulators to decide, a decision driven in part by their diverse legal and regulatory backgrounds.

Now, however, the 184-member IFSB hopes to draw up more concrete steps for regulators while still leaving some flexibility given the wide range of industry development.

“A roadmap can be very helpful to national authorities, and the national industry, but in practice quite a few years of experience is needed before it becomes practical to develop an effective roadmap.”

INTEGRATION

Over the last decade, the IFSB has issued 22 standards and guidelines and now plans to develop new standards for Islamic reinsurance (retakaful) and capital markets, said Ahmed ahead of the IFSB’s annual summit to be held in Mauritius next week.

“The greatest need is to bring takaful and capital markets to a state of comparability, from the regulatory perspective, with the banking sector. So these are two areas where we are gearing up for additional issues.”

A working group to study a standard for retakaful has now been launched and another working group will soon be set up to study a standard for capital markets, Ahmed said.

“This is an important initiative to facilitate the integration of Islamic finance into the global economy by bringing it within the global surveillance mechanism of the International Monetary Fund and the World Bank.”

In the past two years, the IFSB has issued separate guidelines on liquidity risk management, stress testing and capital adequacy, with further guidance in the pipeline.

The IFSB has now begun work on a technical note on stress testing and it has also conducted a study on liquidity issues to help shape a guidance note.

The latter would take up the challenges posed to Islamic banks by the liquidity coverage ratio and net stable funding ratio introduced by the Basel III framework, said Ahmed.

MARKETS

Islamic finance has its core markets in the Middle East and Southeast Asia, but its expansion into new jurisdictions has meant the IFSB is increasingly in touch with regulators in Africa, Asia and Europe.

“Implementation is picking up as the market grows. We see a clear pick up in implementation once the market becomes larger than 5 percent of the total of the respective financial sector.”

Countries like Senegal, Gambia, Nigeria and South Africa have taken steps to develop the industry, while detailed regulatory frameworks have emerged in others, said Ahmed.

“Oman and Kazakhstan are two examples of new markets in which policy-makers have benefited from the experiences of earlier jurisdictions.”

Over the past year, the IFSB has engaged with regulators in Nigeria, Sudan, Hong Kong, Bangladesh, Afghanistan and Libya; It held regional sessions at the Asian Development Bank and in Oman for the Gulf region. Its last European forum was hosted by Italy’s central bank.

“We are now preparing capacity and awareness building to be undertaken in Central Asia and in West Africa,” Ahmed said.

In March, South Korea’s central bank became a member of the IFSB, joining the likes of the central banks of Luxembourg and Japan and the monetary authorities of Hong Kong and Singapore.